An Evaluation of Risk Mitigation Approaches for Geothermal Development

Governments around the world use a wide range of policy and regulatory instruments to support renewable electricity in different forms. Because of its high risk and significant up-front capital requirements, geothermal power stands out as a special case among renewable energy sources. Furthermore, the specific context of the country situation needs to be considered when developing and applying policy instruments aimed at catalyzing and incentivizing geothermal development. Risk reduction schemes for geothermal power projects work best when implemented as coordinated packages that recognize current conditions and needs, thus catalyzing geothermal development and providing the opportunity for geothermal developers to realize a rate of return on investment that is appropriate for location- and time-specific market conditions. The focus of this analysis is the four main schemes that have been used historically in many countries to directly address geothermal resource risk: 1) Government (or government-backed entities) serving as the geothermal developer; 2) cost-shared drilling; 3) geothermal resource risk insurance; and 4) early-stage fiscal incentives (exemption from duties, tax credits, etc.). Each approach is analyzed in terms of its key features, pros and cons, operational and management oversight requirements, impacts on the pace and/or amount of geothermal power production, and the financial impact on stakeholders. Historical examples of how each scheme has been deployed in different countries are discussed, and the level of success for each scheme is evaluated. Recognizing that related activities can improve the profitability of geothermal projects and thus encourage geothermal developers to accept some resource risk, the paper also discusses the relevance of developing adequate infrastructure (such as transmission lines to bring the power to market) and legislated incentives such as the Feed-In Tariff, Renewable Portfolio Standard, Production Tax Credit, and other tax credits or incentives. Although these approaches are not purely “resource risk mitigation” strategies, they increase the comfort level for investing in geothermal development, thereby making the risk incurred more tolerable, improving project profitability and easing the hurdle of project financing.